About Piponomics

Economics plays a huge role in the foreign exchange market. I enjoy looking at economic trends and trying to see how it may affect currencies, and life in general. I will post my thoughts and observations here. I'm throwing macroeconomics, forex trading, pop culture, and everyday life into a pot and hopefully the final product are lessons about the FX market that's easy to understand.

MPC Meeting Minutes: Not as Bullish as You Think!

Well, well, well… It seems the wolf pack has grown by one! Andrew Sentance, a former lone wolf calling for a rate hike, has found a bro in Martin Weale, according to the latest monetary policy committee (MPC) meeting minutes. In the MPC’s January 13 meeting, Sentance and Weale voted in favor of tighter monetary policy.

But the two bros will need more members to join their camp if they’re looking to hike rates by another 0.25%. As of the moment, the MPC looks as though it’s split into three ways as to what it should do.

On one end of the spectrum, we have Sentance and Weale pushing for a rate hike. At the other end, we have Adam Posen, who has remained true to his dovish feathers and is still voting to expand the Bank of England’s bond-buying program by 50 billion GBP. And in between the two extremes, we have the majority of the MPC. Six members believe the BOE should maintain its wait-and-see approach and keep its bond-buying program as is.

Naturally, pound bulls did their thing when they received news that the hawkish camp grew in number. Now that there are two MPC members supporting tighter policy, rate hike-hopefuls have become even more optimistic. The end result? GBP/USD erased half its losses from Tuesday’s upsetting GDP data!

It’s no mystery that the main reason behind Sentance and Weale’s hawkish stance is U.K.’s stubbornly high inflation rate. Inflation has been consistently above the BOE’s 2% target for over a year now, going as high as 3.7% last December.

Here’s a neat little visual for ya’ll:

According to a speech by BOE Governor Mervyn King on Tuesday, the high level of inflation in the country is due to the 20% jump in import prices, the fall in the pound’s value in 2007 and 2009, the rise in world energy prices, and the increase in the VAT rate. He also said that inflation may go as high as 5% in the next couple of months.

However, rising prices isn’t the only factor to consider in deciding whether or not to hike rates. Our BOE chaps also have to check whether economic growth is sustainable enough to weather a rate hike.

But keep in mind, these minutes are from a meeting held a couple weeks before the disappointing GDP results hit newsstands. This means that the MPC members hadn’t taken into consideration the GDP contraction in Q4 when they cast their votes back in January 13.

In fact, I believe we may even see further quantitative easing for the U.K. based on the 0.5% contraction we saw in the fourth quarter of 2010. Perma-dove Adam Posen hasn’t lost to the hawks yet!

Also, remember that austerity measures are coming into full swing this year. A rate hike would be a double whammy for the Britons because it would make borrowing more expensive. Consequently, this would weigh down on consumer spending which is the main driver of economic growth.

With that said, you may want to be extra careful in rooting for the pound. Its recent gains have been because of the prospect of a rate hike and could be nothing more than a relief rally. I think I even see a potential head and shoulders pattern on the daily chart of Cable!

It’s hard to say what the BOE’s next step will be. There’s still too much uncertainty ahead of the British economy for it to take a stab at inflation or pull the trigger on quantitative easing.

This humble old (but devilishly handsome) man shares the opinion of the MPC majority: at this point in time, the best thing to do is to resort to the good ol’ wait-and-see approach.

CAN U PLEASE CONFIRM THE TIME OF POSTING “Posted 05:32 28 January 2011” REFERS TO ET

akeakamai

I like the visual…I think I’ll have to do one up for myself 😀

ANIROODH

CAN U PLEASE CONFIRM THE TIME OF POSTING “Posted 05:32 28 January 2011” REFERS TO ET

ForexGump

@aniroodh: Yes, that is 5:32 am ET

@akeakamai: thanks!

akeakamai

I like the visual…I think I’ll have to do one up for myself 😀

ForexGump

@aniroodh: Yes, that is 5:32 am ET

@akeakamai: thanks!

LarryLivingston

Great analysis. I for one am super bearish on that GBPUSD pair… Was aggressively trying to short all week. This week tomming up, I would be looking todo more of the same… Based on everything you have presented here, we seem to be in a position where the sterling could sell down a few more levels…

Great analysis. I for one am super bearish on that GBPUSD pair… Was aggressively trying to short all week. This week tomming up, I would be looking todo more of the same… Based on everything you have presented here, we seem to be in a position where the sterling could sell down a few more levels…

PS: But what’s with the VIX its moved around a bit since the US GDP reading (last Friday) (Dow and co did not do too well that day I gather). Do you buy into the notion that we may be seeing a broader change in risk trends or is this just a mix of Egypt, plus the reality check in the Island off the land of the Gauls you just been writing about? etc

Darkdoji

To the point and a lot of help. Thanks mate

PS: But what’s with the VIX its moved around a bit since the US GDP reading (last Friday) (Dow and co did not do too well that day I gather). Do you buy into the notion that we may be seeing a broader change in risk trends or is this just a mix of Egypt, plus the reality check in the Island off the land of the Gauls you just been writing about? etc